* Policy seen firmly on hold
* Next real policy discussion only after French elections
* Guidance tweak in H2 could be next step
By Balazs Koranyi and Francesco Canepa
FRANKFURT, March 9 The European Central Bank is
set to keep monetary policy on hold on Thursday as it casts a
cautious eye ahead to high-risk elections in the Netherlands and
France during an upsurge in populist, anti-establishment
Although economic growth and inflation are both picking up,
the ECB is expected to resist calls to tighten policy, pointing
to political risks, weak underlying price growth and a still
fragile recovery nearly a decade after the bloc's economic woes
For once, the outlook is improving. Economic sentiment is at
a six-year high, trade is rebounding, services and manufacturing
output are rising, and unemployment is at its lowest since 2009,
suggesting the economy is in its best shape in all that time.
Even inflation, the ECB's key objective, has rebounded,
essentially hitting the bank's target last month.
For ECB President Mario Draghi, it will be walking a
tightrope. While acknowledging the positive economic
developments, he is likely to keep arguing that the inflation
surge is temporary, growth is fragile, and the outlook is
clouded with risks.
These include -- within weeks -- the Dutch and French
elections and the first meeting of G20 finance leaders since
U.S. President Donald Trump took office.
Economists in a Reuters poll said the ECB's next move will
be either a tweak of its guidance in the second half of this
year or a gradual reduction in its asset-buying next year.
"An important reason for not taking any hasty action is the
ECB's own track record of jumping the gun," ING economist
Carsten Brzeski said. "In 2007/8 and 2011, the ECB hiked rates,
the first based on German wage increases and the second when the
worst of the euro zone debt crisis seemed to be over.
"Both times, the ECB was taught a lesson. It seems unlikely
that the ECB would want to jump the gun for a third time,
particularly not on the eve of two important elections in the
The central bank will announce its policy decisions at 1245
GMT, and Draghi holds a news conference at 1330 GMT.
The bank's deliberations may be heated. The rebound in
inflation particularly has fuelled calls in Germany, the
19-member currency bloc's biggest economy, to scale back its 2.3
trillion euro bond-buying programme or at least start drawing up
plans to wind it down.
But at best the central bank may bump up some economic
forecasts, particularly for inflation. It may also drop its
reference to downside economic risks and let an ultra-cheap
borrowing facility for banks expire as scheduled.
It may also debate but likely reject calls to give up a
reference to lower rates or higher bond buying if necessary.
The French election is likely to be particularly concerning,
even if Draghi may be reluctant to admit it. With far-right
candidate Marine Le Pen wanting to take France out of the euro
zone, markets are already bracing for a shock.
Indeed, the cost of insuring French government debt against
default is up sharply, with five-year credit default swaps
on French debt doubling since the start of the
year. And the spread between five-year French and Germany bonds
rose to its highest since 2013 last month.
Any turmoil would likely hit the periphery just as hard, and
spreads in places like Italy and Portugal are also on the rise,
even as the ECB's main indicator of stress in the financial
system is trending downwards.
Next weekend's G20 meeting in the German town of Baden-Baden
may complicate policy further. The world's top finance ministers
and central bankers may no longer explicitly reject
protectionism or competitive currency devaluations, according to
an early draft of the communique, after the U.S. has accused
some trade partners, particularly Germany, of exploiting a weak
Nevertheless, policymakers have so far suggested that the
ECB is only likely to begin discussing its next policy move in
June, with the first actual move perhaps not coming until after
German elections in September.
"From the current levels, financial markets are more
vulnerable to a hawkish than a dovish tilt," Tuuli Koivu at
Nordea said. "However, the recently seen favourable economic
development probably starts shifting the discussion towards
slightly more hawkish comments in the coming meetings."
(Editing by Hugh Lawson)